The state-controlled airline, currently China’s third largest carrier, said it would raise about Rmb7bn by issuing new shares to strengthen its balance sheet. This follows a cash injection of Rmb7bn from its state-owned parent last month.

The acquisition would be conducted through a share swap at 1.3 China Eastern shares for each Shanghai Airline shares.

Following the merger, China Eastern’s market share in Shanghai will increase from 35 per cent to more than 50 per cent. It will also control 30 per cent of China’s aviation market.

China Eastern has been the worst performer of the country’s struggling airlines industry. Last year, the company saw its total liabilities exceed its total assets by more than Rmb12.6bn. It also made a net loss of Rmb13.9bn because of falling passenger numbers and hedging losses caused by falling oil prices.

Intense price war between the two Shanghai-based airlines – has been a major reason for China Eastern’s losses. China Eastern’s domestic yield per seat is 10 per cent and 3 per cent lower than that of Air China and China Southern – the two other major national carriers – respectively.

China’s aviation industry has shown a sharp drop off in demand this year, following several years of double-digit growth.

Weak demand earlier in the year forced China Eastern to ground an average of 20 aircraft of its 200-strong fleet, and China Southern has been cutting the number of its international flights.

Whilst officials blamed the slump on natural disasters such as last year’s Sichuan earthquake – but analysts say that the weakening economy and stringent security operations, and a rise china’s Renminbi currency against the US Dollar are the main reasons for the drop in demand.